ohio family limited partnership

How An FLP Is Formed

How It Operates

Its Potential Advantages Or Disadvantages

Barry Zimmer ● Estate Planning Attorney ● The Zimmer Law Firm ● 513-721-1513

2 www.zimmerlawfirm.com

“Preserving a family business takes a good deal of careful financial and estate

planning, with the goal of keeping the business intact and financially healthy.”

Despite the rise of conglomerates and mega-stores throughout

the United States, family businesses are still alive and well in

America.

For most people, a family business is more than just a way to

earn a living – it is a legacy that needs to be protected and

preserved for future generations. Preserving a family business

takes a good deal of careful financial and estate planning, with

the goal of keeping the business intact and financially healthy.

It is therefore important to choose the right kind of entity for

your family business to form. The choices of entities can seem

overwhelming, and it’s wise to carefully analyze and consider

the future impacts your choices will have on your business.

Many family businesses form a family limited partnership, or

FLP. Read on to learn how an FLP is formed, how it operates,

and to learn about its potential advantages or disadvantages.

What Is a Family Limited Partnership?

When family members create an FLP, they join in a legal

partnership, becoming joint owners of family-owned assets,

such as those connected with a family-owned business. There

are two classes of partners: general and limited. In an FLP,

general partners are legally liable for the actions of the

partnership. Limited partners, meanwhile, are not legally

accountable for group actions, and their liability is limited to

the value of their partnership interest.

General partners have complete control over the partnership’s

operations, and share in profits and distributions. Limited

● ● ●

Family-owned businesses,

farms, ranches, and land

holdings are often the most

important and valuable

asset of a family’s legacy.

Sadly, less than 30% of

family businesses survive

the transition to the next

generation – a problem

that is sometimes but not

always caused by estate

taxes. More often

businesses fail after the

founders die due to issues

not related to taxes.

● ● ●


partners still share profits and distributions from the FLP, but

do not have control over operations.

How Is a Family Limited Partnership Formed?

The first step in creating an FLP is to file paperwork with the

Secretary of State of the FLP’s home state. The name of the

filing may vary among states, but will be something like

“Articles of Limited Partnership” or “Certificate of Limited

Partnership”. The form and filing instructions will most likely

be available online.

When filing the initial form with the Secretary of State, you will

need to appoint a Statutory Agent. If your FLP is ever sued, the

Statutory Agent will receive initial lawsuit filings on behalf of

the partnership. If you form your FLP in a state where you

don’t live, there are companies who provide this service.

The next step is to execute a written partnership agreement.

Among other details, the agreement will name the general and

limited partners, and will assign them duties and

responsibilities. There will also be provisions addressing how

partnership interests can be sold, transferred, or encumbered,

all of which are necessary for keeping the FLP’s assets in the

family.

Therefore, unlike other partnership agreements, an FLP

agreement will usually forbid selling, transferring, or otherwise

encumbering a partner’s interests to anyone outside the family.

What Are the Advantages of a Family Limited

Partnership?

There are a number of advantages to forming an FLP, some of

which concern tax, transfer, and liability issues.

● ● ●

Creating a family limited

partnership can help you

meet such diverse goals as

estate planning and lawsuit

protection.

● ● ●

● ● ●

In an FLP, general partners

are legally liable for the

actions of the partnership.

Limited partners,

meanwhile, are not legally

accountable for group

actions, and their liability

is limited to the value of

their partnership interest.

● ● ●


Liability and Control

Bringing future generations into a family

business can present some difficulties. The

next generation will have a lot to learn,

and they may not be ready to jump in and

make decisions right away. They may also

have doubts about taking on the

responsibilities and risks of running the

business. An FLP allows you to slowly and

incrementally bring a child or grandchild

into the business, limiting the individual’s

control over business decisions and

protecting him or her from liability if something goes wrong.

Transfer of Ownership

When a group forms an FLP, they also create

fractionalized interests in the partnership. Think of

these interests as the equivalents of stock in a

publicly traded corporation.

For example, imagine that Bob and Mary Johnson

own a family landscaping business. The business has

done well over the years and owns approximately

$12 million in assets. Among those assets are about

100 acres of land for growing trees, shrubs and

flowers; a warehouse for storing materials and

equipment; an office building; a small fleet of trucks

and other vehicles; and various other assets used in

the daily running of the business. The Johnsons also oversee some of the business’s financial

accounts.

When Bob and Mary create their FLP, all of these assets go into one “pot.” The general and

limited partners own shares or interests in the partnership. When the couple wishes to begin

transitioning their business to the next generation, they will only gift pieces or shares of the


Specially designed Family Limited Partnerships, with a gifting plan, can reduce

estate taxation and still allow the business founder to maintain operating control.

FLP, instead of gifting interest in the business’s underlying

assets. As the heads of their business, Bob and Mary will

maintain control over the company’s operations - and

ownership of the general partner interests – until retirement or

death. The Johnsons might also choose to give yearly gifts of

interests to their children and/or grandchildren without

affecting their control over the company.

Tax Savings

This is where the FLP gets interesting. Both lifetime gifts and

gifts passed down at the time of death are subject to taxation.

However, taxpayers may still gift or bequeath assets up to the

current lifetime exclusion amount, set at $5.25 million for 2013,

and indexed for inflation. Annual gifts of $14,000 per donor per

donee (in 2013; indexed for inflation for future years) can be

made in addition to the lifetime exemption of $5.25 million.

Put simply, the value of the gifted asset or property determines

whether the gift is taxable or tax-sheltered.

As discussed above, partners in an FLP do not directly own

interest in the business’ assets; they own the FLP. Limited

partners in an FLP have less control over the business than

general partners, and they also have less control over the

interest they’ve received through the partnership. Therefore, a

limited partner’s interests are not as valuable as those of a

general partner. Due to this difference in value, limited partner

interests receive a “discount,” since somebody buying those

interests would pay less than the partnership interest’s pro rata

● ● ●

Partners in an FLP do not

directly own interest in the

business’ assets; they own

the FLP. Limited partners

in an FLP have less control

over the business than

general partners, and they

also have less control over

the interest they’ve

received through the

partnership.

● ● ●


value, due to lack of control over partnership operations and

other factors.

Referring back to the example of Bob and Mary Johnson,

suppose that the landscaping business’ FLP owns $10 million

worth of assets. Their daughter, Sally, owns a 10% limited

partner interest. Since Sally is a limited partner, her share is

actually worth less than 10% of the partnership’s $10 million,

and this difference would still be relevant if Sally wanted to sell

her interest and cause the price to be less. This is the basis for

a valuation adjustment or “discount” when reporting the gift

on a gift tax return or valuing the assets on an estate tax return.

Of course there are details to be seen to, such as appraisals to

support the discounts.

Lawsuit Protection

An FLP can also provide valuable lawsuit protection. If a

partnership gets in legal trouble and is sued, the limited

partners are only at risk for what they have put into the

partnership in exchange for their partnership interests. Limited

partners’ personal assets are not at risk.

Similarly, if a limited partner gets sued for reasons not related

to the partnership, the judgment creditor cannot take over the

partner’s interest and force it to be sold to pay the claim. At

most, the creditor will get a “charging order,” which would

allow the creditor to receive FLP payments originally intended

for the limited partner. Since the general partner controls the

distributions to the limited partners, this puts the limited

partner / debtor in a better position to negotiate a favorable

settlement, or perhaps dissuade the judgment creditor from

even trying to collect.

The general partner, on the other hand, has unlimited liability.

That means if the partnership is sued, the judgment creditor

can collect against the general partner’s personal assets and

income to satisfy the FLP liabilities. This can be a serious risk.

Protecting Your Assets With The

Family Limited Partnership

Are you worried about being sued?

Well, you should be. It is reported

that there are 18 million lawsuits in

the United States each year.

However, that isn't the whole story.

Have you ever heard of the "deep

pocket" syndrome? The deep pocket

syndrome means that the person

claiming to have been harmed files a

suit against anyone even marginally

connected with the incident.

Click to Get Your Complimentary

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“Protecting Your Assets With The

Family Limited Partnership”


But this risk is managed by making the general partner an

entity that protects the individual owner from liability. The

Limited Liability Company is often an ideal tool for this

purpose.

What Are the Disadvantages of a Family Limited

Partnership?

An FLP can be costly to set up initially, but the tax savings

generally far outweigh the cost of creation.

There has also been some speculation about the future of

discounts in FLPs. The American Taxpayer Relief Act of 2012 did

not include any significant changes to FLPs, so for now it

appears as though they are still an excellent option for anyone

who wishes to preserve and pass down a family business to

future generations. But it is anticipated that future tax

legislation proposals could include measures that restrict this

very powerful tax planning tool, so acting sooner rather than

later would make your new FLPs “grandfathered” under

currently existing law, rather than covered by the new law, as a

general rule.

Barry Zimmer engages in a Wealth

Care Practice. Specific services

include basic and advanced trust

planning; trust estate settlement;

probate estates; trust beneficiary

advocacy and representation; asset

protection; business organization;

business succession planning; and

pre-marital planning.

His goal is to make creating a Wealth

Care and Estate Plan the first step in

a relationship that is satisfying and

unlike a client's experience with any

other lawyer.

The Zimmer Law Firm 9825 Kenwood Road, Suite 201

Cincinnati, OH 45242 Phone: (513) 721-1513

[email protected]